Daddy, Make the Bad Man Go Away

So, it’s 10:15 PM and your eight-year-old just woke up with a nightmare. While you’re tending to him, the phone rings and of course your 13-year-old daughter gets to it first. A minute or two later she bursts into her brother’s room crying, and blurts out to the two of you that the nasty man on the phone just told her that mommy and daddy would go to jail if they didn’t pay their old credit card bill.

She has just met your boogeyman—the debt collector.

What do you do?

People who have been targeted by debt collectors often feel isolated, embarrassed and without any support or understanding of what’s happening to them. For those who do try to reach out for help, the problem is that there are so many people you can call, the average consumer can get very confused very easily, and waste a great deal of time before finding someone who may be able to actually help. Right now, depending on which state you live in, you might call: the Federal Trade Commission; your state Attorney General; your state, county or local Department, Division, Bureau or Office of Consumer Protection (which may or may not be part of the Office of the Attorney General); the Better Business Bureau; the innumerable attorney ads you discover if you Google “debt collection abuse;” or a host of other federal, state, for-profit, and not for profit private agencies. The further you peel the onion, the worse it gets. “Water, water everywhere, nor any drop to drink.” You live in Sandusky, but the debt collector called from San Diego. If you try calling the bank that issued the credit card, eventually you will find someone with a brain who will inform you that “it’s out of my hands,” you need to call the same debt collector who called you—if you have the tenacity to get that far.

Unfortunately, guidelines for the debt collection process are misunderstood, not necessarily followed and/or in many cases largely ineffective—the result of mind-numbing regulatory redundancy. The result is unspeakable practices by many debt collectors who have more of a free hand than they should. Sadly, purposeful misinformation, threatening phone calls and other forms of harassment have become the norm.

Because the mantra of the debt collection business is “show me the money,” the ends justify the means and the customer is never right. For the most part, individual collection agents are paid a serious percentage of what they collect. Most collection agencies are principals, not agents. They don’t work for the credit card companies, banks or stores with which the debtor did business. They buy that debt from those companies, usually at four to seven percent of face value. Again speaking very generally, the cost of collection plus the purchase price of the debt typically doesn’t exceed 20% of face. Therefore, if an agency can collect 50% of the debt they are making a whole lot of money, and the individual agent who facilitates that collection can be paid as much as a third of the profit.

Personally, I am convinced that some of the vultures who were hawking fraudulent penny stocks 10 years ago and pushing rip-off mortgages and refis five years ago are now trying to collect “charged-off” debts.

But for the first time in a long time—maybe for the first time ever—I have hope that things could soon change for the better. In a few short weeks, on July 21 to be exact, the Consumer Financial Protection Bureau will open for business. Among its many important responsibilities will be the regulation of the “Wild West Show” that currently is the debt collection industry.

How Shall the CFPB Proceed?

First, let’s take a look at where current regulation falls short. The problem of—let’s call it “overly aggressive”—collection tactics was dealt with by Congress back in 1977 with the passage of the federal Fair Debt Collection Practices Act, which is administered by the FTC. Over the course of the last 34 years, however, many things have changed. Firstly, the debt collection business has grown geometrically and is insanely lucrative thanks to a parade of recessions, and perhaps more importantly, due to the fact that the government itself began selling off large packages of bad debts in the early 1990s through the Resolution Trust Corporation—a big business indeed. Secondly, new technologies have enabled potentially abusive tactics, like robo-calling, that could not have been anticipated in 1977. And finally, the increasingly obvious weaknesses of the federal law got the states into the act, and thus nearly every state has a different law on the books purporting to protect consumers from collection abuse. The principal federal law in this area is the Federal Trade Commission Act—of 1914. You read that right—1914.

The FTC is a good agency in many ways, but it was established to do the “trust-busting” work of the Wilson administration. You really think an agency that needs to approve a merger between Exxon and Mobil can really help when your 13-year-old daughter gets that call? Here is what I believe the CFPB needs to do:

1. Consolidate Regulatory Authority

Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB has broad power to create and enforce rules regarding collection practices, and in theory at least, will be far more capable of doing so than the beleaguered FTC. All federal regulatory authority must be consolidated within the CFPB, with the FTC having concurrent jurisdiction only for large scale frauds operating across many state lines, and even then only when the CFPB asks for help. Furthermore, the new Bureau must coordinate with any state agency active in the area, perhaps by suggesting uniform state regulation, and uniform intergovernmental procedures.

2. Set Clear and Simple Rules

It is an absolute necessity that we have a simple set of regulations that must be followed nationwide by EVERYONE who attempts to collect a debt as well as uniform enforcement and strict penalties for those who would violate those regulations. Right now, state and federal penalties for abusive collection practices vary widely; in some jurisdictions, a small fine—small enough to be disregarded by profitable agencies and high earning individual collectors—is the only available sanction.

3. Focus on Education

The CFPB has a mandate to educate consumers about their rights and remedies in the collection area, as well as many others. I believe that reforming, modernizing, unifying and publicizing rules that protect debtors from unreasonable collection tactics are among the Bureau’s most important tasks. No matter how competent any regulatory organization may be, no one is capable of protecting you better than you… as long as you know your rights. (I believe everyone should read “Debt Collection Answers” by Credit.com expert Gerri Detweiler and Mary Reed—though worth its weight in gold, it’s priced as if it were paper.)

4. Prosecute the Law Breakers

The CFPB will no doubt come across countless debt collectors and scammers posing as debt collectors who may be guilty of brazenly breaking the law. The CFPB must have a close working relationship with the Department of Justice to ensure that these people are brought to justice. For example, the proliferation of overdue debt and the concomitant growth in the debt collection industry has spawned a truly vicious new kind of scam which exploits the fear and confusion of many Americans who are at the moment financially weakened. In 2009, the Better Business Bureau put out an emergency alert warning people about debt collectors who were harassing people who had no bad debt as part of an identity theft scheme. The reason that these attacks work is because the criminal is already in possession of enough information about the alleged “debtor” so as to terrify the target on the other end of the phone. No agency of any government is today equipped to assuage this problem; only a highly directed, broadly empowered, fully fanged and funded Consumer Financial Protection Bureau can handle this one.

5. Protect the Privacy of Debtors

The scam artists who try to collect those phony debts are able to do so because the personal information of so many people is so easily available in so many places. No reader of this column can doubt that personal information is not adequately protected by law, or by any other way. But even if a given debt collector is not a hardened criminal, the banks and other vendors who sell off their bad debts necessarily include the personal information of the debtor as part of the sale! So yet again, you can’t know who’s got their hands around the neck of your identity. But given the fact that abuses are commonplace and complaints are soaring, the CFPB needs to take immediate steps to ensure that whatever information is given to debt collectors, there are strong procedures and incentives designed to be certain that dogged pursuit of the debtor cannot extend to the abuse of his identity. At the very least, there must be a due diligence requirement such that banks and other vendors cannot simply sell off their bad debts willy-nilly to the highest bidder; sellers of that debt must know their customers so that there is at least some assurance that your personal information is not being handed over to the modern equivalent of the James gang.

Capitalism always provides a way for someone to win, and thus some fortunes are improved during even the worst of times. In the US, many who profit more during a recession are easy to think of as “bad guys.” Repo men, short sellers and debt collectors fall into this category, but they’re simply doing what they do. Debt collectors are perhaps the worst of the lot because in addition to living off the misery of others, regulation of the debt collection business is badly conceived and administered, and it’s overregulated. Given this lack of effective oversight and the huge amount of newly-minted bad debt floating around out there, ravenous debt collectors have far too many opportunities to abuse people struggling to get through life in this abysmal economy. All of this drags our economy, not to mention our spirits, down further.

So if Washington wants to show it’s serious about dealing with the issue of debt collection abuse and wants to keep the financial boogeyman out of your 13-year-old daughter’s life, Congress needs to stop partisan bickering about the funding and authority of the CFPB and appoint a strong director—right now. Elizabeth Warren was the president’s first choice for that job and, as any reader of this column knows, I believe she would make an excellent chief executive. Now there is word circulating that the president may choose Raj Date—a good man with an excellent background—instead of Warren to circumvent the problem that Republicans seem to have with her. Although I have still not heard one good argument against Warren’s appointment, one of them needs to be appointed immediately so that the Bureau can hit the ground running on July 21.

Perhaps to make our point we’ll have to start robo-calling Congressmen—at home at 10 p.m.